How To Evaluate Outsourcing Sensitivities in People, Products and Processes

If you’re considering some form of outsourcing — especially offshoring — consider putting your organization through a sensitivity assessment, to determine how sensitive your products, processes and people are to such a transformation. The rapid discovery process identifies operational preparations to address sensitivities and introduces an appropriate governance structure. It delivers a preliminary framework to make an economic evaluation of your outsourcing or offshoring plans. It also creates a base for overall operational improvement.

In this article I take a representative company through the assessment to show you how it works. I don’t dwell on offshore setup costs related to physical infrastructure or communications.

Andy Ford is the CIO of an SME, responsible for new application development and maintenance of existing applications. Currently, he needs to perform a delicate balancing act between these functions, as shown in Figure 1. Andy’s job will get more challenging with time; he expects a more than doubling of his staff (currently at 75) in the next 18 months, to continuously develop the value chain of his clients while maintaining focus on existing products and services.

Figure 1: Operational challenges.

Demands on Andy’s organization are shown seated on a three-legged stool, supported by the legs of productivity, quality and scalability. The legs need to keep the stool in balance. The floor that keeps the stool standing is cost sanity (not cost reduction).

Like other business managers, Andy has heard about global IT outsourcing and offshoring, but he is unclear whether his organization fits the requirements. He wants to have better insights into his operational sensitivities for offshoring, as well as obtain a cost-benefits analysis.

Andy has a series of meetings with his management team on the business challenges. The group openly discusses ideas for driving the business through better quality, higher productivity and increased volume of products and services while controlling incremental costs. The team suggests evaluating alternative solutions such as staff augmentation, local outsourcing, internal hiring, phasing out future work and offshoring. As part of a rapid assessment of options, the team decides to get outside help to evaluate offshoring due to its perceived complexities.

Let’s look at the steps they go through in this offshoring evaluation process.

Step 1. Get Educated on Offshoring

The management team participates in a seminar on how offshoring can grow the business. They get an understanding of both positive and negative aspects and hear case studies. They get to hear offshoring experiences of how the stool collapsed due to a rush for very low costs, only. Andy reinforces the message that the in-house team needs more client focus to continuously ascend the value chain; outsourcing is an enabling function for this to happen. The team also develops a list of concerns for discussion in the next step.

Step 2. Explore People Concerns

The issues raised by people can be categorized into three areas:

Job transformation and picking up new skills.

Concrete benefits that the company will experience.

Logistics of offshoring and associated costs.

Discussions on the first item center on job growth for technical and management professionals. Most of them are progressing to increased responsibilities every two to three years, and the offshoring scenario would be no different. It would enable existing staff to grow to designer/architect and global management positions. A phased approach for gradually increasing the scope of offshoring would be beneficial. Discussions on the other items focus on the costs and benefits of offshoring, which are covered in the assessment process.

Step 3. Establish a Strategy

The next step is to envision an operational strategy for the IT group. The team defines product architectures, high-level design and prototyping along with critical maintenance functions as core competencies that should be performed in-house, while other types of work have the potential for offshore execution. Further, offshore operations and in-house operations would need to work in harmony and adhere to standard processes and technologies, with each end supporting the other. The team conceptualizes an integrated operational model, which is a long-term, steady state view of the operations (2-plus years down the road), as shown in Figure 2.

Figure 2: Integration strategy.

The team brings in its knowledge of operations, to determine approximate percentages. The in-house group would focus more on new applications and the offshore group would focus more on application maintenance. The operations would also utilize the time zone difference between US and an offshore destination, such as India, to have a virtual 7×24 task force.

Step 4. Gauge Sensitivities to Offshoring

The long-term strategy creates an anchor for further discussions on tactics. Now, the team needs an understanding of its current state of readiness for offshoring and the scale of preparations required. This is handled by performing a rapid sensitivity analysis of the products (applications), processes and people in the operations. The goal of this analysis is to determine the current state of offshore awareness and identify internal effort/cost involved to build this awareness (or preparation), to address logistical issues (as I cover shortly).

As the team seeks answers, it shines a spotlight on existing operations and discovers issues that remain buried in the urgencies of day-to-day business. Uncovering the realities has a positive impact on operational improvements — and not just on offshoring.

Sensitivity of Products

Any software product or module possesses key attributes, such as architecture, business logic, degree of coupling with other software or stand-alone functionality, intellectual property (IP) content and documentation, which determines its sensitivity for offshoring. A high sensitivity for an attribute implies a high risk and significant in-house preparations to lower the risk. The converse holds good for an attribute with low sensitivity for offshoring. In a couple of brief discovery sessions, the team uncovers attributes for various products, a sample of which is shown in Figure 3.

Figure 3: Product sensitivities. (1=low, 2=medium, 3=high)

This is an example of a module that has complex business logic and moderate IP content and isn’t coupled to other modules. Offshoring of this module would involve investing in training on the business logic and IP, besides documentation and handling of confidentiality. A phased approach in preparing products or modules for offshoring should help.

Sensitivity of Processes

Software engineering processes used by the team possess attributes such as roles and responsibilities, formal practices (for example, for specification, design and testing), hand-offs (modularity), special handling of sensitive data and automation via tools. Sensitivities of these attributes with regard to offshoring are different. A short discovery session identifies these. A sample is shown in Figure 4. Investments in lowering the sensitivities or risks of some of these attributes would enable the in-house team to effectively manage the specification and verification of offshore tasks.

Figure 4: Process sensitivities. (1=low, 2=medium, 3=high)

There exists a process discipline for management of software engineering. To make offshoring effective, more investment in automation — for example, collaboration tools — is necessary. Offshore handling of sensitive data requires more stringent processes to be developed. A phased approach in organizing in-house processes for interfacing with offshore will help.

Sensitivity of People

In a couple of short discovery sessions, key attributes are identified that relate to people, such as risk appetite, prior experience with outsourcing, multicultural background, ability to build relationships and flexibility in work timings. A sample is shown in Figure 5.

Figure 5: People sensitivities. (1=low, 2=medium, 3=high)

Investment in training will include remote project management, bridging differences in perspectives between the in-house and offshore groups, outsourcing governance and others. The people aspect is also best approached incrementally, by working with a few key people and making them successful in offshoring, followed by more people involvement.

Step 5. Outline Provider Selection Process

Andy and his management team have had several calls from offshore providers in the last few months, requesting a piece of their business. These providers have ranged from well known companies to less reputed ones, with varying costs and capabilities. As part of this assessment, a profile of the right offshore provider and the selection process are outlined.

The profile of the right offshore partner will be determined by the following attributes:

Successful track record in offshore execution with emphasis on the domain.

Flexibility in contracting, for instance, ease of use in moving from fixed price to dedicated staffing.

The right chemistry, exemplified in similar business practices, ethics and work-life balance.

The process for short-listing a set of providers will be to work through business contacts and interview qualified prospects; if necessary an RFP will be floated. However the final selection will be made personally by Andy and two of his top managers through site visits.

Step 6. Identify Governance Structure

While preparation for offshoring is a necessary item for managing the risks, this isn’t sufficient. It has to be complemented by an effective governance mechanism at runtime, which should synchronize in-house and offshore operations. This requires a strong management discipline (comparable to the engineering discipline discussed in the “Sensitivities of Processes,” section) at work with great clarity in roles, responsibilities, expectations and deliverables.

Managing offshoring is unique due to the absence of regular face-to-face contact between the in-house and offshore groups. Andy’s management team in cooperation with the selected offshore provider will need to lay down formal work schedules and deliverables, provide timely resolution of issues, implement protocols for handling scheduled and on-demand communication, execute project monitoring and undertake regular trips to the other end to interact face to face. As part of this assessment, an appropriate governance structure for offshoring management is identified, along with its strengths and limitations.

Step 7. Calculate Preliminary Costs and Benefits

The final step in the assessment process is to build a preliminary cost-benefits model for offshoring. Included are estimates of investments in preparations, governance and other setup costs. Included in the benefits are estimates of operational cost reduction compared to a full in-house operation. Significant revenue enhancements for the company, due to staff utilization in value-added work, is also expected.

During the assessment process, a few products and processes stand out from the rest in terms of their low sensitivities to offshoring. A few managers also show more eagerness than others. This leads to the idea of offshore outsourcing in phases, starting with a few reasonably simple fixed price pilot projects and moving on to more complex projects, with a dedicated number of offshore staff. In the long term, Andy would also like to have an option to convert the offshore entity to a subsidiary of his company, thereby exercising a build-operate-transfer (BOT) model.

Investment in preparations, governance and setup is accounted for as a percentage of the total work under execution offshore. While this has some limitations, it’s compatible with the overall management overhead principle, and serves as a reasonable first approximation.

Figure 6 shows a preliminary estimate of annual operational costs with actual numbers in the steady state (2-plus years down the road). To the left we see the current operation. In the center, this has grown to a blended in-house offshore operation. To the right we see the alternative of growing to a full in-house operation with no offshoring.

Figure 6: Incremental cost reduction in offshoring.

Model Parameters:A. Fully loaded cost per person year for in-houseB. Fully loaded cost per person year for offshoreC. # of in-house staffD. # of offshore staffE. In-house management overhead in preparation, governance, and setup, expressed as a % of offshore effort

For example, A = 120K$, B=36K$, C=75 (current), D=85, E=30%. The computed incremental cost reduction with offshoring is 40%, when compared to a full in-house operation.

The in-house management overhead is conservatively estimated at 30%, which suggests that the offshore labor cost is just half of the total cost of offshoring. The overhead is expected to be high in the early (learning) phases of the operation. With knowledge and experience, this should settle down to a lower value, in the steady state.

It appears that Andy should be able to leverage offshore outsourcing to develop the value chain of his clients, while reducing his incremental costs, to balance his three-legged stool.

Conclusion

In a week of part-time discussions Andy and his management team gain significant insights not only into the offshoring process, but into their whole operations. They’re better equipped to make an informed decision about using offshoring to address their business challenges. They also have a preliminary model to generate quantitative estimates, which will get more detailed as the offshoring strategy evolves. They gain an understanding of their pivotal role in this process and sense an opportunity to learn and grow.